All aboard the digital banking journey

Digital banking

THE evolution of any industry that comes from the innovations and disruptions that redefine it is always an interesting phenomenon to watch.

The smartphone evolution in the late 2000s dethroned Nokia from the best-selling mobile phone brand to almost nothing when it was too late to enter the smartphone market.

Then there was Kodak, which commanded a market share of 85% for cameras and 90% for camera films in its heyday but had to file for bankruptcy in 2012 due to its worsening financial performance since the late 1990s.

Despite being the first to invent digital photography, their focus on the legacy photographic film product weighed them down while their competitors went in big on digital.

These examples have never failed to serve the humble reminder that, no organisation, no matter how deeply embedded its roots, are safe from the threats of technological advancements if they remain complacent doing the status quo.

And among the various disruptions that are taking place globally, one that is being closely watched, especially in Malaysia, is the future of banking.

The past decade has seen many disruptions from payment systems to blockchain, fintech, crowdfunding and peer-to-peer lending, all of which seem to be giving conventional banks a run for their money.

In the region, the Hong Kong Monetary Authority has issued eight virtual banking licenses last year while the Monetary Authority of Singapore has issued four.

Bank Negara is well aware of the accelerating pace of which financial services are moving into the virtual space and the initiatives it has to undertake in supporting the nation’s transition to a digital economy.

This led the central bank to launch the Policy Document on Licensing Framework for Digital Banks on Dec 31.

The size of the banking industry in Malaysia currently is approximately around RM3 trillion to RM5 trillion in terms of total assets.

While no one can accurately predict the size and future value of a full-fledged digital bank but with non-bank companies such as telco group Axiata Group Bhd, conglomerate Sunway Bhd, tech firm Green Packet Bhd and AirAsia Group Bhd through its card-based money app BigPay openly stating their interest, it seems quite obvious that the value proposition of digital banks is immense.

So when the concept of digital banking started to surface in recent years, many people wanted in.

The furore also attracted lesser known companies that are hoping to jump on the bandwagon to get a slice of the pie.

It was like the start of the data analytics and data science boom several years ago. Nobody understood what it was, but everybody wanted a piece of it.

Applications for the license closes on June 30 and Bank Negara is looking at issuing up to five licenses by the first quarter of 2022.

It is learnt that more than 40 parties have registered their interest to apply for the license.

New entrants, new competitionCIMB Group Holdings Bhd, which has been making great strides on the digital front through its wholly-owned subsidiary Touch ‘n Go Sdn Bhd and its digital bank in the Philippines and Vietnam, said they were approaching this “new” competition on multiple fronts.

Touch ‘n Go Sdn Bhd owns 51% in TNG Digital Sdn Bhd, the joint-venture company with China’s Ant Group that runs the Touch ‘n Go eWallet, the leading e-wallet in Malaysia with more than 15 million registered users.

Effendy Shahul Hamid, the chief executive officer of CIMB Digital Assets and the group CEO of Touch ‘n Go said they are innovating internally to ensure they acquire capabilities as quickly as possible in order to continue to compete.

“New entrants will bring new capabilities to the market which we all hope will then create higher standards and fuel a more vibrant financial services marketplace.

“Ecosystem and platform players have really made a huge impact in other areas of day-to-day life. I am of the view they will make an impact on banking, ” he says.

Effendy adds that incumbents have generally taken two distinct views on digital banks – evolve internally to compete, or partner to build a separate business outside the core.

The former could take the form of accelerated digitalisation or building a “bank within a bank”.

“But to do this, one must believe they have the right people, culture and capability for this to succeed and ‘separate’ management track where speed and execution are concerned.

“For banks who opt to partner to build separate businesses outside – to be successful, the right DNA for partnerships must prevail, insecurities must be lifted on cannibalisation and the intent to build a highly valuable business outside the core with separate governance should be embraced.

“Whatever the approach, I think there are no rights or wrongs. Success will still come down to differentiators to today’s banking services, ” he says.

Deloitte Malaysia innovation and regulatory leader Justin Ong says establishing a partnership with an incumbent bank would allow a digital banking applicant to leverage on the former’s existing capabilities to establish a bank.

This would not only give a head start when setting up operations, but also provide Bank Negara the confidence that the digital bank has the backing of an incumbent bank to operationalise the business and to provide guidance to achieve its business plans.

“However, a digital banking applicant would need to meet Bank Negara’s satisfaction in promoting financial inclusion such as ensuring quality access and responsible usage of financial services, and driving innovation by creating new products and services.

“This is an area that incumbent banks have not been able to achieve. Traditional banks today are not embracing technology at the speed that startups in other industries are.

“The expectation is thus for digital banks to invest in innovation and technology in the areas of risk management and compliance, from day one, ” says Ong.

PwC Malaysia financial services technology consulting lead Ravi Kittane says the key advantages of partnerships would be the ability to develop products, capabilities and services which are otherwise difficult to achieve within their own environment due to legacy and culture issues.

“They would be able to access new clients and data which is hard to replicate within their current environment and they can look forward to learning and absorbing new ways of working and use of technologies into their current setup.

“Some of the pitfalls of this strategy are of course, the increased complexity of running two licensed banks.

“The capital, technology and talent requirements for the setting up of a digital bank can be onerous, and the shift of focus towards digital banks may lead to reduced investment in conventional banks, ” says Ravi.

Strategies of the non-bankers

Green Packet group chief strategy officer Ku Kok Peng says it is important to firstly recognise that the goal of digital banks is different from that of conventional banks.

“There will be expectations for digital banks to behave in a more agile manner, while still complying with the local regulatory expectations, have the ability to rapidly provide quick solutions and innovations to respond to customers and have the capability to introduce new products to the market more quickly.

“Some digital banks in other countries have been able to launch new capabilities in as quickly as two weeks. This rapid response is certainly an enhancement that we can look forward to, upping the ante in financial services in general, ” he says.

The group has just completed its purchase of Xendity Pte Ltd in February, an e-Know Your Customer (e-KYC) firm.

Ku adds that financial inclusion is essential for a more equitable society, adding that the Covid-19 pandemic has further underscored the need to support and protect the underserved segments of society, especially those who are disproportionately affected.

He says that based on Green Packet’s years of experience in understanding and in serving the needs of the underserved and unserved, the insights gathered were that they look for a unique and meaningful user journey and not just another technology toolbox.

“We recognise that serving what the mass population needs versus what the underserved and unserved need are very different.

“A digital bank must be one that is user-centric, with the agility to deploy innovations that will redefine the way users save, spend and invest their money in the future.

“As a company that has placed great focus on understanding the unserved community, we believe a digital bank will be able to make a difference in transforming and improving the way they lead their lives, ” says Ku.

A spokesperson from Axiata says the group already has an algorithmic lending model to enable competitive pricing and robust risk management and going forward, this will be built further on analytics and artificial intelligence to provide better customer solutions, product personalisation and better risk-based pricing to its customers.

It said its core competencies, coupled by its vast resources and experience collectively gathered over the years and across our footprint markets in Asia, provide a strong and unique foundation for the establishment of a digital bank in Malaysia.“Axiata’s fintech business today cover new growth areas of finance, payment, lending and insurance aimed primarily at the underserved and unbanked segments of society.

“Boost is a leading homegrown lifestyle e-wallet delivering convenience and revolutionising the way consumers transact daily while Aspirasi is a digital micro-financing and micro-insurance provider using technology to offer micro entrepreneurs a unique value proposition in terms of simplifying financial access, ” he says, adding that Axiata’s digital bank proposal will be announced soon.

A spokesman from Sunway says the group aims to build a fintech ecosystem, promoting financial inclusion for Malaysians and small and medium enterprises (SMEs) aligned with the 17 Sustainable Development Goals (SDG) adopted by the United Nations, particularly Goal 10 - Reduced Inequalities.

The group acquired a 51% stake in Credit Bureau Malaysia last year in its move in diversifying into the fintech space.

“With our venture into digital banking, and leveraging Sunway’s thriving ecosystem, we aim to provide a comprehensive, seamless and easily accessible digital banking service, all within a few clicks.

“With our large ecosystem, we are able to reach out to various segments of the population to understand customers’ needs, either SME or individuals, and strive to provide products and offerings that will be able to address their pain points, ” the spokesman says.

Sunway owns 100% of Sunway Money, the first completely online and licensed remittance service provider that allows international money transfer with just RM1.

Targeting the unserved

While those that don’t meet the conventional bank thresholds form a significant portion of the unserved market, Ravi says there are segments such as digital natives, gig workers, students, and single proprietor SMEs which are unserved as well.

“Digital banks will not be successful if they use conventional methods of customer profiling, driven by historical performance and assets to serve these segments.

“Access to low cost credit and financial services can be made available to these segments to drive prosperity and growth by using alternative data sources, intimate customer knowledge, behavioural AI, mico-segmentation and targeted product offerings, ” he says.

Ku shares similar views, saying that a digital bank operates very differently in building and tracking a customer’s journey and is much better able to assess the customer’s financial capacity and risk and to grow with them.

In analysing Malaysia’s household debts, Ku says the majority comprises housing and vehicle loans, which are all simply collateralised.

“But the underserved, whether individuals or micro-SMEs, have real needs that traditional banks are ill-equipped to serve because conventional bank-customer relationships are not built on a deep and meaningful understanding of the customers’ financial behaviours and patterns.

“It is not a matter of whether people need more loans but whether the loans are going to the right people and businesses, where they can be productive and contribute to the economy.

“One cannot take a chopper to the issue when what you need is a more precise scalpel.

“The underdogs need a champion and a digital bank can be both the hero, and yet be a viable and sustainable business, ” says Ku.

As adequately banked as Malaysians are, Ravi says as a new world emerges with dramatically different customer preferences, access to new technology, maturing AI capabilities and data analytics becoming mainstream, there are opportunities for the digital banks to make an impact.

“In Malaysia, if digital banks can offer compelling propositions, they will make an impact.

“The existing banks will continue to compete as well with their own digital offerings, breadth of products, and depth of client relationships.

“It will be interesting to see how the market takes shape over the next few years. There will be winners and losers, ” he says, adding that existing banks may lose market share, if they don’t move quickly to modernise their infrastructure, deliver new digital capabilities and drive efficiencies.

For banks, there is no more luxury of time for digitalisation. Unless it is a committed sprint towards a digital transformation and a continuous strive for innovation, it is only a matter of time that banks may find themselves losing their competitive advantage and soon become case studies of business schools.

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